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. Last Updated: 07/27/2016

Euro Plunges to New Low Despite Higher Rates




PARIS -- The euro plunged to a new low against the dollar Thursday after the European Central Bank raised interest rates, a move that normally makes currencies go up.


The decline that occurred instead was a sign the central bank is losing credibility among international investors, analysts said.


It was a disastrous day for the euro, the 16-month-old joint currency of 11 European nations, and for the central bankers who govern it. The euro was worth $1.17 when it was introduced Jan. 1, 1999. It traded Thursday at as low as $.909 despite the ECB's action.


The Deutsche mark, the most important currency in the euro union, has not been this low against the dollar for 14 years. The euro also is at record lows against the British pound - Britain is not a euro member - and the yen.


The euro "is beginning to approach historical extremes," said Stefan Bergheim of Merrill Lynch in Frankfurt, Germany. "Unfortunately, currency markets can go on at extreme levels for quite a while."


The euro's decline is bad for Europe because it makes monetary authorities look powerless and because a weak currency means imported goods become more expensive, raising inflation.


But it also is bad for the United States, for a different reason. With the U.S. dollar running so high, American exports have become more expensive in foreign markets and therefore U.S. companies are selling less overseas.


The ECB raised its benchmark interest rate from 3.5 percent to 3.75 percent. The increase was no surprise; officials had been signaling it was coming in order to head off potential inflation.


In its statement explaining the decision to raise interest rates - the fourth time the bank has raised rates since last November - the bank said it "continues its policy of reacting to upside risks to price stability in the medium term in a pre-emptive manner."


As for the currency, "the present level of the euro does not reflect the strong economic fundamentals of the euro area."